What is Corpus Fund: How is it Calculated and Used?

Funds are a sum of money, or you can say the amount can be used for any purpose in any field to finance any project or pay off debts, or acquire any assets. Banks and financial institutions have the funds mainly deposited by their customers, while a company can have the funds from various resources like general reserve, borrowed as a loan, bonds or shares issued in the market. Similarly, a corpus of funds is a terminology used in the financial sector. It is different from general funds as it is collected for a special purpose and used for the same. Here we are going to learn what is corpus fund, how it is calculated, why it is required and where it is used.

What is a Corpus Fund?

It is the total sum of money collected from a pool of investments and set aside for a specific purpose or invested in a financial scheme. It is different from the operating budget or income of the organisation, representing the principal amount, and only returns can be used for the designated purpose. Educational institutions, trusts and non-profit organisations keep such a corpus of funds to ensure financial stability in the long term. NGOs or charitable organisations get the corpus of funds through donations. On the other hand, the corpus of funds is managed differently in financial markets through mutual funds by AMCs.

Meaning of Corpus Fund in the Stock Market or Mutual Funds?

In terms of the stock market or mutual fund industry, the corpus of funds is the sum of the pool of money collected from different investors and managed by the Asset Management Company (AMC) to invest in various financial instruments to get returns. The principal amount is used to invest in securities to get returns. The corpus fund can be collected through the launch of a certain scheme with different options to contribute to the fund, either through periodic investments or a lump sum amount, depending on the type of scheme. The corpus is collected and calculated as per its purpose and type of use.

How is a Corpus Fund Calculated?

The calculation of a corpus fund might be different for different organisations and institutions, it is typically calculated using the following components.

1. Initial Capital: This is the amount collected initially from the investors to establish the fund for investing.
2. Further Contributions: Apart from initial deposits, the fund may receive ongoing contributions through regular deposits by the investors or additional schemes launched by the AMC.
3. Returns on Investment: The corpus fund also includes the income generated in the form of interest, dividends, or capital gains by investing the initial funds into various securities.
4. Withdrawing: Any amount withdrawn by the investor or fund contributor reduces the total corpus fund.

Source of Corpus Funds

The corpus funds are collected through multiple sources to ensure the fund is available with the asset management company for investing into various financial instruments. However, there are multiple channels through which the corpus funds are accumulated through the following resources.

• New Fund Offer: When a new fund is launched through a new fund offer (NFO), investors subscribe to such offers during the NFO period and the amount collected is used to create the portfolio of the investors.
• Reinvesting of Income: The income generated from investing the corpus funds into various financial instruments, such as capital gains, dividends and interest earned, is reinvested into such funds.
• Lump-sum Investing: The investors keep investing into such funds with a one-time amount deposited into close-ended or one-time investment schemes offered by AMCs, which keep increasing the corpus fund.
• Systematic Investment Plans: Corpus funds also get regular investment through systematic investment plans that play a key role in ensuring the cash flow of funds through open-ended schemes.
• Other Sources: Apart from the above-mentioned key sources, the corpus gets the funds from unexpected sources like shareholders, government and donations from individuals, businesses, or other organisations.

Why is the Corpus Fund required?

A corpus of funds in the mutual fund industry is necessary to invest in various financial instruments and get a lucrative return for the investors. However, the importance of the corpus fund is not limited to collecting it for investing but using it with the right strategy to enhance its value and help the investors achieve their financial goals. However, there are various reasons why a corpus fund is required.

1. Create a Pool of Investment: It is necessary to create a corpus of various participants through a pooled investment. In mutual funds, each investor holds a stake as per their share of investment, but collectively, all of them create a pool investment that is necessary to start a new investment scheme.
2. Management of Fund: The asset management companies appoint fund managers to manage such a corpus of funds. The main objective of these fund managers is to create a corpus of funds and use the same for investing into various financial instruments to maximise the returns with the right investment strategy.
3. Diversify the Investment: A larger corpus enables investment across multiple asset classes such as equities or stocks, bonds, gold and other assets.
4. Financial Stability: Corpus funds provide financial stability in uncertain market conditions. In case of uncertain market conditions, such funds can be used as an investment opportunity.
5. Gain Trust of Investors: Last but not least, it is also necessary to gain the trust of their investors by giving them lucrative returns or utilising their funds in the right manner to maximise the earnings.

What is Corpus Fund Used for?

The corpus fund is mainly used for investing in various financial instruments from different sectors of the economy. However, it is also used for various other purposes that are listed below.

• Investment in Financial Instruments: The main purpose of the corpus funds is to collect funds from different investors and invest them into various asset classes like equity, debt instruments, real estate, gold and other investable instruments to get lucrative returns and appreciate the value of capital.
• Liquidity Management: Corpus funds help to manage the redemptions claimed by the investors to transfer their amount whenever they liquidate their investments.
• Reserve for Emergencies: In case of emergencies, to meet the unexpected financial needs, a corpus of funds is also needed. Such funds should also be kept for various unfavourable economic conditions or financial crises.
• Portfolio Diversification: It is also used to invest in different types and categories of investable instruments to diversify the portfolio of the investors, helping them to enjoy investment exposure in various fields.

Conclusion

Corpus funds are the pool of money or amount kept for a special purpose, whether it is a charitable trust, educational institution, financial company or asset management company. In the mutual fund industry, it is a pool of money collected from different investors to use this fund for investing into various classes of assets to enhance the value of their investment with the advantage of portfolio diversification. A corpus of funds is required not only to invest in financial instruments, but also to meet the redemption of investments and utilise the funds for unexpected investment opportunities and for urgent needs. However, in the mutual fund industry, it can be accumulated through various investment schemes offered by AMCs.

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Frequently Asked Questions (FAQs)

What is corpus fund?

A corpus fund is a pool of money accumulated over time through regular savings and investments to achieve a specific financial goal. It is commonly created for purposes such as retirement planning, children’s education, emergencies, or long-term wealth creation.

How much corpus fund is enough?

The ideal corpus fund depends on your financial goals, lifestyle, future expenses, inflation, and investment horizon. For example, retirement corpus requirements are usually calculated based on expected annual expenses, inflation rate, and post-retirement years. A higher corpus helps provide better financial security and stability.

Is corpus fund taxable?

The taxation of a corpus fund depends on the type of investment used to build it. Returns from mutual funds, fixed deposits, stocks, or pension schemes may be taxed differently according to prevailing tax laws. In some cases, specific investments may also offer tax-saving benefits under the Income Tax Act.

What is the difference between corpus and savings?

Savings generally refer to the money set aside for short-term needs or emergencies, while a corpus is a larger amount accumulated over the long term to meet major financial goals. Savings are usually kept in liquid and low-risk instruments, whereas a corpus is often built through planned investments that generate long-term returns.